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Don’t Blame China for Rare Earth Crisis

The dust-up over China's restrictions on the export of rare earth minerals masks an unpleasant truth: The West and Western manufacturers are paying a hefty price for their greed and stupidity.

Western mines were once the main manufacturers of these minerals, and known deposits in the United States, Europe, Australia, and Russia account for a majority of global reserves. But at one point, it became easier and much cheaper to get the minerals from China. We shuttered Western mines, laid off the miners, and told the Chinese we'd take all the rare earths they could produce. Now China is tightening the price and supply screws. Why are we surprised?

It may be a sign of what the future holds for Chinese-Western relations. I know it may seem like I am forcing the issue, but this situation buttresses my point in previous blogs about the dangers of shifting too much global manufacturing not just to one region of the globe, but to a single country. (See: 5 Reasons Western Factories Will Hum Again and Manufacturing Will Grow Again in the West.)

China has become the go-to place for most high-tech manufacturers, and the failure to provide backup or assure critical redundancy measures may come to haunt everyone.

The rare earths dispute is a potent example of this glaring error. On Tuesday, the European Union, Japan, and the US hauled China before the World Trade Organization and accused it of hindering free trade and imposing unfair conditions on foreign companies by cutting supplies of the rare earth minerals used in a wide range of products, including high-tech equipment.

Even President Obama weighed in by saying China's actions were hurting American manufacturers. “We want our companies building those products right here in America. But to do that, American manufacturers need to have access to rare earth minerals which China supplies.”

First, let's deal with the outrage of the complainants. I am only surprised that it took this long for them to act after more than a year of quiet complaining and negotiations to get China to open up its rare earths market to non-Chinese companies.

EBN bloggers have discussed how the Chinese government is controlling access to the metals and giving preferential treatment to local companies on the basis that they need the minerals to keep their factories running. (See: The Truth About Rare Earths, Part 1 and The Truth About Rare Earths, Part 2.)

Since many of these companies manufacture products for export, China's government felt justified in assuring supply to local manufacturers first. But over the last six months, China has imposed even more stringent terms for foreign access to the minerals. Since the country controls 97 percent of global production, this has caused a stir, especially among European, American, and Japanese high-tech companies. More recently, China not only has cut the quota available to foreign companies, but also has begun fiddling with prices. It has established a two-tier structure where Chinese companies get minerals for less than half the amount paid by foreign competitors.

The Chinese government has defended its actions by saying it is trying to curb pollution. Yes, China says it is worried that its environment might be hurt by overexploitation of a group of minerals that, despite the name, are commonly available in the country. I don't buy that reason, so let's look at the economics.

China, in my opinion, is more concerned about the overexploitation of its mineral resources and is trying to make it more expensive for foreign companies to access them. Consider this: China accounts for “36 percent of the world's total reserves” of rare earth minerals, according to a report by the official Xinhua news agency. Yet the country is responsible for more than 90 percent of global production. That's screwed up!

“China is contributing tremendously to the rare earth industry,” the Xinhua report said. “China's rare earth measures, including imposing export quotas, are fair and legitimate, and are simply aimed at protecting its environment as well as its natural resources. They also conform to relevant WTO rules.”

You disagree? The WTO will give its ruling eventually, but by then the cost to Western companies will have risen even higher. China might even ignore the WTO and wait for the West to impose retaliatory measures. Which would be what, exactly? Stop buying Chinese products? Sure.

We made our bed, and it's not comfortable lying in it.

24 comments on “Don’t Blame China for Rare Earth Crisis

  1. Houngbo_Hospice
    March 14, 2012

    Part of China's argument does make sense: “cheap export prices cannot make up for the environmental damage caused by the exploitation of rare earths.”  What does the West say about that? The west does not always set a good example when it come to implement rulings. Pressing China to sell its rare earth at cheap prices, is certainly not the best solution as China has now more influence in deciding the prices for many commodities. 

  2. Barbara Jorgensen
    March 14, 2012

    Right on, Bolaji. Once again we see too little, too late. A year ago, this move could have been applauded as aggressive, proactive and prescient. Instead, for the US at least, it looks like politicking. Japan has actually been trying to make a move like this for a long time but didn't have the economic clout to make it stick. The EU clearly has a lot tied up in advancing green technology. The US is the biggest export market for China. An alliance is a no brainer. Now, we should look to a different kind of alliance: these nations can band together to develop and subsidize alternative sources of REEs. China has demonstrated over and over that it won't cave to economic pressure. Why should it? They are holding all the cards.

  3. Cryptoman
    March 14, 2012

    This is the same as imposing visas on foreigners. In order to protect the domestic economy, every country imposes visas to outsiders who wish to come in and get a job. The Western countries are very familiar with this system. Almost everyone finds this treatment to be fair and economically logical because jobs are rare and the nationals should have the priority access to them.

    Why shouldn't China give priority to the local businesses when it comes to rare earth metals? Why shouldn't China look after its national interests when it comes to its natural resources? The West always have and always will look after its own interests so can anybody blame China for doing the same? Not really.

    Furthermore, China did not force anybody to shut down its mines and to stop digging for rare earth metals. The West did all that willingly and even at the painful cost of many local people losing their jobs and fleeing their home towns to take a chance in the big cities. The 1996 British movie called “Brassed Off” is all about this tragedy in the northern England. I am sure there were similar tragedies in other parts of the world too.

    Progress of a civilisation is very much dependent on the availability of natural resources and how well these are used. Technological progress cannot change that fact as we are seeing today.

    It sounds like the West will have to go back to the good old pickaxe and spade at some point.

  4. ITempire
    March 14, 2012

    I agree with you Barb. I think its not fair to expect from China to give up its hold on the resources. Actions on the part of other alliances of the world is necessary. Also all the countries need to realize that imposing regulatory restrictions on China may be a short term solution; the long term solution can only be that the other countries ensure that they are active contributors to global production of rare materials as well. Also its surprising to see that despite so much dependance of Chinese revenue on exports in US and EU, the Chinese are not being dictated the terms by WTO and other world bodies. 

  5. bolaji ojo
    March 14, 2012

    Hospice, What would you suggest the West do? I agree “pressure is not the solution” but what are the alternatives?

  6. bolaji ojo
    March 14, 2012

    Barbara, We handed them the cards — and then we whine because they won't share the way we prefer. It reminds me of a TV ad where this woman just had a breakthrough moment during which she realized she had been making a bad move for quite a while and then wondered what other “stupid” decisions she had taken in her life. What's China going to hammer us with next?

  7. _hm
    March 14, 2012

    This is good opportunity for China to earn. We wish them best but it will be difficult journey for them.

     

  8. Wizzard-of-Rad-eee-ooo
    March 15, 2012

    Right On Bolaji.  I've spent 20 years in the electric power industry serving oil-gas production and 20 years (yep still working) in SDR (software defined radio) in avionics and military. 

    My observations: 1. Changes in the Administration, Congress and political appointees to critical departments (energy, state, commerce) every 2-8 years, and the absense of consistent corporate tax rates (that don't expire) has resulted in shifting production of minerals and hydrocarbons offshore. 2. The lack of a national minerals and energy policy that is not politically driven (for 40 years) pushes corporations to 'cheaper' sources. 

    We can shift corn from a food source to making expensive ethonol, with gov't  encouragment (subsidies), but we can't develop our own resources (decade by decade) involving minerals and petroleum.

    There is about 3 days food in our stores and 2 weeks of energy in our pipelines.  I'm thankful bulk electric power must be genreated the instant it is used: otherwise we would be importing that as well.

    It takes decades to plan and execute domestic energy independence and a source of metals-minerals and I haven't seen anything to encouraging during the last 4…..

  9. chipmonk
    March 15, 2012

    China itself is actually the biggest beneficiary of Wall St. and its short term policies. Thanks to Wall St hold on DC, the media and academia, for the last 25 years China has been playing the US for chumps and racking up a trade surplus of $ 350 billion per year since 1995 ( they import from the US only food grains & raw materials since Wall St. siphons off US technology to China for free ! ),

    Its Wall St. demand for 20 % ROI or else that ran down the various established mines in Eagle Mountain & Sierra Nevada ( CA ) for REMs like Lithium, Yttrium and Neodimium and in the early 2000s sent the dismantled Beneficiation & Process equipment at scrap price to China.

    China is now selectively applying environmental concerns and conserving its  reserves to justify putting a hold on its production of REMs ( at Golmud using US equipment with ore mostly from the high-altitude dry lake beds of Tibet and XinKiang – forcibly occupied by China with phoney historical claims ).

    Playing hardball is the only language that Neo-Imperialist China understands. If the US were to strategically target China and revive CoCOM controls ( done away with during Reagan's second term ) China will fold in 3 years.

    But the paid FIFTH COLUMN-ists shilling for China within this country ( including on EBN Editorial blogs ) would do their darndest to prevent that.

     

  10. Kevin Jackson
    March 15, 2012

    Nice article Mr. Ojo, thank you.

    Let me see if I understand the situation.

    The US and China have REEs.

    The US has strict and complex federal environmental laws, complex federal land use laws, complex federal labor laws, complex state, county and city laws, all of which change erratically and unpredictably in wording and enforcement, as well as a unionized work force. China has few laws that come from a single authority and workers that work and live almost as slaves.

    So, any financially minded user of REEs will buy the cheaper materials from China. This means US mines will go out of business. Now that US mines are out of business hundreds of bureaucrats have nothing to do (great!) and tens of thousands of mine workers have no job (not so great!).

    If we make the products in the US, you would add the cost of shipping to the cheap Chinese REEs, making them less attractive. But, as long as we make the products in China, locally procured REEs will probably always make more sense.

    Being essentially the only supply of REEs, China can now set the price they wish, very much like OPEC sets the price they wish.

    What to do? Pay that price and let US investors decide when the price has risen high enough to make resuming mining operations in the US financially viable.

    I don't see a problem with China charging more for exported REEs, as long as they don't restrict supply (can't imagine why they would). After all, there are many countries with REEs and with a regulatory and employee protection environment somewhere between the US's and China's that will start mining if a profit can be made. If China restricts supply enough, the price will go up beyond the price they set and alternative supplies will be created even more quickly.

    Shall we review the steel industry's recent history? The Japanese, with no iron on the island, made themselves the world supplier of steel and put the US steel industry in mothballs. Have we learned anything yet?

     

  11. Barbara Jorgensen
    March 15, 2012

    @Kevin: Good point about the steel industry and OPEC. I was also thinking of diamonds and De Beers. Anyone that controls a commodity (oil, diamonds) can control the production, export and price. The US arguably has oil reserves that we don't tap, or they are too expensive to tap. We also have sources of REEs, but they haven't been deemed as economically viable (read, too expensive). It is only when things start to get too expensive, or political pressure starts to get too intense, that the government reacts. The electronics industry has been rasing the alarm about REEs for awhile, but now we act? We were up in arms about oil prices, but as soon as gas crept down to $3-plus/gallon we forgot all about it. Like Wall Street, our needs are short-sighted and we do the same thing over and over again.

  12. bolaji ojo
    March 15, 2012

    Wizzard-of-Rad-eee-ooo, Imagine if electricity could be stored and exported. You are right. We would be importing even this from China and we would be wailing if they shut off the spigot. Perhaps we are just crying wolf where there's none but lets all hope China remains our trading partner and abide by WTO rulings, otherwise there's a lot we get from them now that may vanish during an argument.

  13. bolaji ojo
    March 15, 2012

    Kevin, You got it. The only dissention I have is on the issue of restriction on supply. China is restricting supply and has done this successfully so far because of two factors. One, it knows it will take time to restart alternate supply sources and, two, it knows the China rare earths price is still well below the foreign ones. Plus, as you noted, we are making the end products in China anyway so if Western mines are restarted we will have to add shipping costs to already expensive mining costs. So, what do we do? We complain to Congress and WTO and then we pay their price/continue to pay whatever they charge.

  14. Anna Young
    March 15, 2012

    “The West and Western manufacturers are paying a hefty price for their greed and stupidity”

    Bolaji I agree with your assertion. Why would anyone blame China for tightening the price and supply of her mineral resources, The Chinese government is only protecting the interests of its people and the nation. At least China is not refusing access, is only restricting supply at a higher cost. So what's all the noise making for?

  15. ITempire
    March 15, 2012

    @ Barb

    I read an article where they were blaming US for deliberately keeping its oil well unused. May be they are waiting for the time when oil wells in the Middle-east and other oil-extracting regions, get dried up. If that is the strategy, then it is smart thinking and not short-sightedness. US govt has always been a good strategist and to expect them to tolerate higher prices from other supplying nations is very unlike of it. If the extracting cost is being too high is the problem, this problem can be resolved as costs come down through experience learning curve if continuous extraction is made.  

  16. Barbara Jorgensen
    March 16, 2012

    @Waqas: I wish I were as confident as you are there is a strategy behind this! The reality is, drilling/not drilling in the US is purely political. You would think it is supply/demand related, but it's not. Depending on what party is in power, drilling is good, then there's an oil spill, drilling is bad, gas prices go up and we are back to square 1. But clearly, China's move on REEs is also political, whether they admit it or not, so they are no worse a “villan” than the US.

  17. ITempire
    March 16, 2012

    @ Barb

    Certainly China is a villian too. Anyone who captures natural resources and makes contribution in creating artificial demand-supply gap for business motives and causes a common man to suffer is a villian.

    As far as the WTO agreement and UN is concerned, the individual country politics by giants has become so powerful that no agreement and a single organization can dictate terms to the parties. Unfortunately US has a lot of dependance on China so they cant just openly start a fight against China's anti-competition activities. 

  18. Barry
    March 17, 2012

    Thank you for the article. I have not read much about REEs except to know of the U.S potential vulnerability, but your article has motivated me to know more about them. The one comment I would make at this time is to suggest that China doesn't separate economic policy from political policy. An example of this is their decision to threaten not to buy any Airbus planes from Europe, as a protest of the EU policy of charging all airlines for carbon emission credits. I would think their action re: REEs has a political side to it, and might even justify another article suggesting links. 🙂

  19. William K.
    March 19, 2012

    For starters, don't blame ME for other people's poor choices, OK!!! Another thing that led to the mines over here closing was probably the safety people heaping all kinds of demands on the mine operators. At some point costs will exceed income and the operation has to stop. Remember that this is not a perfect world.

    Another problem is that there has been no real effort to reclaim all of the rare earths from the scrapped electronics, in fact, it seems like the goal has been to get the products into a landfill as fast as they can, so that they can sell new ones. If we were able to recover all of that magnetic material we could also save a lot of the cost of refining the materials, as well.

    And of course there is still China, which, by the way, is still a communist run police state, even though ome businessmen are making lots of money. And while the people want to be a bit more like us, and the government is quite polite, and much more subtle, it seems that they have not changed that much. Remember that a lot of these government officials were part of the problems associated with the VietNam war. That battle may be over, but the war may not be ended, only revised.

  20. bolaji ojo
    March 20, 2012

    Barry, Thank you for the suggestion. I'll certainly follow up as you suggested with the political side of REE. And you are right, China makes no apologies about mixing up business and politics. We knew that going in but didn't factor it in and now we want the WTO to mediate? It's unlikely to resolve the challenge.

  21. bolaji ojo
    March 20, 2012

    William K., Just because they are now making more money doesn't mean the Chinese have forgotten their political believes. They want a piece of global commerce but this wolf in sheep skin still has its fangs. Plus, we walked right into the trap and want them to let us off. Not going to happen unless we make an offer they can't refuse.

  22. Barbara Jorgensen
    March 20, 2012

    WilliamK: I suspect that reclaiming the REEs from scrap is not economically viable. There have been several efforts by both government and NGOs to find ways for the US to free itself of dependence on foreign sources of…was it oil? Oh, right, REEs. I get them confused because neither effort made any headway.

    Anyway, I've included a couple of links here about those efforts:

    http://coffman.house.gov/images/stories/hr4866.pdf

    http://www.toyota.com/

  23. William K.
    March 22, 2012

    @ Bolaji, You are certainly correct about that, the ideologies have not changed, I don't think. The one thing more dangerous than a communist is a rich communist, because somehow being rich does not seem to point out the contradictions that are so intrinsic in the basic communist creed.

    As for reclaiming the magnetic materials not being economical, it must be the cost of getting the hard drives reclaimed, rather than the removal of the magnets themselves. Ten years ago I offered a suggestion that the way to ensure recovery of materials from electronics was to add a deposit to it, a lot like the deposit on pop bottles and cans, so that they would be recycled instead of trashed. If it were $100 or so, it would be fairly certain that most of the discarded computers, phones, and personal music devices would find their way into recycling centers instead of landfills. Of course a whole lot of people would scream very loud at the concept of making disposal “so complicated”, but it would also keep a who;e lot of stuff out of landfills. In fact, if there were such a deposit required on moist electronics we could probably eliminate that STUPID ROHS rule and get back some reliability in many devices. Of course, there would need to be some extensive means and methods to prevent a whole lot of fraud, which could be an unpleasant problem. BUT it would be one potential solution.

     

  24. Anne
    March 26, 2012

    I don't blame China for their policy on this issue, it is a logical move of protecting their resources.

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